W.Va. tax threat looms because of ‘fiscal cliff’ fear

Worst-case scenario would mean an immediate hit to taxpayers

December 10, 2012

CHARLESTON - West Virginia appears largely insulated from near-term program cuts if 2013 arrives without a new agreement on federal revenues and spending, but many of its taxpayers will take an immediate hit if President Barack Obama and Congress fail to avoid the so-called fiscal cliff, state officials said.

Negotiations continue in Washington to avert automatic tax increases and spending cuts set to begin in January. The hikes would reflect the expiring of lower income tax rates enacted at the behest of then-President George W. Bush. Each tax bracket would see its rate rise by between 3 percent and 5 percent. The back-and-forth discussions have included whether to extend all or just some of these Bush-era cuts, state Deputy Revenue Secretary Mark Muchow said.

If rates were to rise for only individual income exceeding $200,000 and family income over $250,000, for instance, around 11,200 West Virginia households or single filers would face a higher tax bill, according to U.S. Internal Revenue Service statistics. Filers in that income range account for 1.4 percent of federal tax returns by West Virginians.

But all wage-earners should expect to start paying more toward Social Security, even if the fiscal cliff is avoided. Muchow said support appears to be building around ending a temporary payroll tax reduction, which would increase its rate by another 2 percent of income. Roughly speaking, that hike would cost West Virginians earning $35,000 annually another $700 a year or around $13.50 a week.

"That's probably one of the changes that we can count on happening," Muchow said. "That will lower disposable personal income, and will have an effect on consumer spending."

A $1,000-per-child tax credit might also be cut in half, while a standard deduction level for married couples may shrink, Muchow said. But he said a more vexing option involves the way higher income taxes can be levied against filers who seek multiple deductions, credits and other tax preferences, Muchow said. Congress has routinely blocked this alternative minimum tax with a legislative patch, but may fail to for 2013 if the impasse continues, he said.

Around 10,120 West Virginia filers were subject to the alternative minimum tax in 2010, Muchow said. Their ranks could surge to between 50,000 and 70,000 households, he estimated.

"It's a paperwork nightmare as well as the possibility that you'll be paying higher taxes," Muchow said. "History indicates that a patch will be created, it's just a matter of when. ... I believe any deal that emerges will include a patch. It's just whether a deal will emerge before Jan. 1 or after."

The automatic spending cuts would total $1.2 trillion over nine years, but state Budget Director Mike McKown noted that two key areas for West Virginia - Medicaid and highway-related funding - aren't included.

"Our bigger programs are exempt," McKown said.

For many other programs, they rely on funding from previously issued federal grants that will last for the next year or two, McKown said. Only when they seek to renew their federal funding after that will potential problems arise.

"Even if this does take effect Jan. 1, it would take a year or more before you would feel the effect for most state agencies," McKown said, adding that "I've not heard anything (from state agencies) like, 'Oh we've got to shut the place down if sequestration takes place.'"

The across-the-board budget cuts are known as sequestration, and will be most felt in states where the economy is dependent on government spending and military dollars. Those states include neighboring Virginia and Maryland, which host federal agencies and military bases.

"They have all that Beltway stuff, and a lot of (federal employment) salaries," McKown said. "That's why they're going to get whacked."

Were sequestration to hit West Virginia a year or so from now, McKown said it would appear similar to the 7.5 percent cuts that Gov. Earl Ray Tomblin has ordered to most state agencies for the portion of the upcoming budget that relies on general revenue taxes. But these federal cuts could be painful, McKown added.

Stressing that these cuts were far from certain, McKown estimated that West Virginia might lose $6 million for special education and $7 million for aiding low-income public schools.

"I know a lot of teachers are paid with that money," McKown said, referring to the latter figure.